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5G: the fifth generation of wireless networks

Nick Evans

Partner, Global Technology Team

5G is the fifth generation of wireless networks and promises to provide users with better responsiveness, greater bandwidth and faster download speeds. When fully rolled out, it will also allow operators to develop new commercial products, applications and services and deliver them more cost effectively.

While speeds will be significantly higher that 4G, initial 5G networks only bring some of the benefits – consumers will achieve faster internet and be able to upload videos more quickly – but new commercial applications will likely be more limited. This is because many early 5G rollouts around the globe are mostly built on a 4G back-end infrastructure utilising mid/low frequency spectrum; as such they should be considered an interim solution which only delivers some of the long-term promise.

For example, while AT&T in the US experienced speeds on its early 5G E network, this still utilises a 4G LTE core and delivers speeds only 2x faster than 4G. That said, they have now begun to roll out millimetre wave 5G+ which should ultimately be capable of 1-2 gigabit-type peak speeds.

In the UK, you can see something similar occurring. Networks like EE are initially utilising 5G to provide faster speeds and more capacity in busy areas. This is part of an overlay network. According to EE: "5G will work hand-in-hand with 4G: when you connect to 5G on EE, you’re actually connecting to both the 4G and 5G parts of the network at the same time[i]."

True 5G (ultra-low latency combined with much higher speeds of 1 gigabit+), will need to see carriers implement standalone 5G networks, supported by a new 5G core. In countries like the US, this will also be tied to the rollout of higher frequency 5G spectrum (known as mmWave) which until now has not been used for mobile services. In the UK, like many other countries, it will be quite some time before standalone 5G networks are available which utilise these higher frequency bands.

5G is an important theme for us – in all three funds run by our technology team – and we have begun to gradually increase our exposure here. However, in the near term we expect a lull in network spending in the first half of 2020.

In part, this is because much of the recent demand strength has come from initial coverage rollouts in the US, but also in China where the rollout of 5G accelerated partly due to the trade war (providing Huawei with domestic support). However, US export restrictions limiting the supply of component parts to China and or US pressure on countries like the UK not to use Huawei (leading to delayed network rollout decisions) is having an impact. Recent 4Q19 results announcements from Xilinx and Ericsson certainly suggest a pause in 5G rollouts, both in China and the US.

5G handsets will also no doubt see strong initial demand from early adopters, particularly in late 2020 when Apple launches 5G iPhones, but we do not see it driving a more significant upgrade cycle until 2021/2022. Over time, semiconductor suppliers to 5G base station and handsets/devices should benefit from increased demand and significant content increases. We also expect Apple will see a tailwind from higher priced devices and a shortening of replacement cycles; some of this benefit has already been captured in exceptionally strong 2019 stock performance.

Over time, the benefit of higher speeds may extend to other companies such as Netflix and Spotify as well as games software stocks.

Longer term, it is the combination of substantially higher speeds and, more importantly significantly reduced latency that will bring the true commercial promise of 5G. Once this occurs, we expect the most significant impact will be in commercial (the internet of things; industrial automation) and automotive (advanced driver-assisted systems; automated vehicles) applications.

There is clearly a lot of interest building around 5G, much of it deserved, but there is also considerable hype. We certainly consider 5G as a core theme in our funds, however, it is just one of many themes with strong secular growth prospects. As a reminder, our Polar Capital Global Technology Fund offers broader exposure to 8 core themes: Data Economy & Artificial Intelligence, Cloud Infrastructure & Security, Digital Entertainment, Online Advertising & eCommerce, Industry 4.0, Robotics & Automation, Mobility, Connectivity & 5G, Software "Eating the World" and Payments & Fintech.

Nick Evans

Nick joined Polar Capital in September 2007. He was appointed lead fund manager of the Global Technology Fund on 1 January 2008, and is also a fund manager on the Polar Capital Technology Trust and the Polar Capital Automation and Artificial Intelligence Fund.

Nick was previously head of technology at AXA Framlington where he was lead fund manager of the AXA Framlington Global Technology Fund and the AWF Framlington Global Technology Fund between August 2001 and July 2007. Both funds were rated five stars by S&P and received several S&P and Lipper performance awards. Nick graduated with a BSc (Hons) in Economics from University of Hull.

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